There are some times when there are no strong sectors for our sector rotation to work with. 2002 is an example of one of those years when nothing seemed to sustain any strength. Those are the times when a sector rotation strategy may still produce returns greater than those of the market, but in a year when the market is down more than 15%, that may be of little comfort.

Our Fidelity Select sector rotation strategy does have the ability to move to cash when there are no strong sectors in the market. This is done quite simply. As we mentioned before, the metric we use is the recent price change normalized to the volatility. As you can imagine, if the recent price change is not greater than zero, then it most likely is not a predictor of a price increase over the next 30 days. So you would avoid taking a postion in a Select fund that had a negative value for it’s price strength metric.

As it turns out, the same is true for very low values of recent price changes as well. So, for our system, if the fund relative strength metric of the top rated funds does not exceed an arbitrary value that we have come up with, then instead of buying that fund we will rotate into a money market fund. Doing this does slightly reduce the total return of the system, but it reduces the risk as measured by the Sharpe Ratio or the Ulcer Performance Index significantly.

Next we will talk about the creation of the Fidelity Select fund list we use.